The latest iteration of the tool maps the geographic density of specific healthcare service providers and the number of Medicare beneficiaries using those services.
The Centers for Medicare & Medicaid Services has unveiled an expanded version of a data tool that features interactive maps for market saturation and utilization of several healthcare services at the national, state and county level.
The Market Saturation and Utilization Data Tool was developed for use by providers to help analyze their service locations and the service utilization rates of Medicare beneficiaries.
CMS uses the data tool's market saturation and healthcare service utilization information as one means of rooting out fraud and waste in the Medicare program. The tool was formerly called the Moratoria Provider Services and Utilization Data Tool.
Market saturation is defined as the density of providers offering a particular healthcare service in a geographic area relative to the number of Medicare beneficiaries who utilize the service in that area.
Improvements to the tool include an increase in the number of healthcare-service categories from eight to ten. CMS added clinical laboratories that bill independently of other facilities and physical and occupational therapy services.
The interactive-map function of the data tool offers two display options: nation-by-state and state-by-county.
In addition to two color-coding options, the interactive-map function features pull-down menus with three sets of data: 10 healthcare service categories, four yearlong reference time periods, and five Medicare data metrics.
Healthcare service categories:
Emergency ambulance service
Nonemergency ambulance service
Emergency and nonemergency ambulance service
Clinical laboratory that bills independently from other facilities
Home health
Hospice
Medicare Part A independent diagnostic testing facility
Medicare Part B independent diagnostic testing facility
Physical and occupational therapy
Skilled nursing facility
Yearlong reference time periods:
October 2014 through September 2015
January 2015 through December 2015
April 2015 through March 2016
July 2015 through June 2016
Medicare data metrics:
Number of Medicare fee-for-service beneficiaries
Number of service providers
Number of users per service provider
Percentage of users out of fee-for-service beneficiaries
Average number of service providers per county
The latest version of the tool is its fourth update.
Incentivizing hospice care and launching hospice educational efforts in regions with high medical costs could have a significant impact on U.S. healthcare expenditures, researchers find.
To reduce healthcare spending, areas of the country with relatively high medical service costs would benefit most from increased utilization of hospice care, according to a study recently published in Health Affairs.
The study's authors focused on the potential economic benefits of increased hospice care because medical services in the final year of life account for a large share of total U.S. healthcare expenditures.
They found that "hospice use accounted for 8% of the expenditure variation between the highest and the lowest spending quintiles, which demonstrates the powers and limitations of hospice use for saving on costs."
A 2010 study published in the journal Health Services Research found that 5% of Medicare beneficiaries account for more than a quarter of Medicare spending in their final year of life.
The Health Affairs study, titled "Longer Periods of Hospice Service Associated with Lower End-Of-Life Spending in Regions with High Expenditures," is based on Surveillance, Epidemiology, and End Results (SEER) Medicare data and Medicare claims information.
The data sample features 103,745 Medicare beneficiaries who died from nine forms of cancer such as breast, lung, and liver tumors within three years of diagnosis. The study period was from 2004 to 2011.
Cost Analysis
The unadjusted (non–age-sex-race-adjusted) mean end-of-life care expenditure per decedent "was $39,600, ranging from $31,256 in quintile 1 to $49,680 in quintile 5. The mean length of hospice service in the final six months of life was 10.9 days, ranging from 13.0 days in quintile 1 regions to 7.9 days in quintile 5 regions."
Researchers found that the biggest economic benefit from hospice care is derived from increasing utilization in high-medical-service cost regions of the country.
"Longer periods of hospice service were associated with decreased end-of-life expenditures for patients residing in regions with high average expenditures but not for those in regions with low average expenditures," the researchers wrote.
Regional Care Differences
The way physicians practice medicine likely is a key factor in determining the economic impact of hospice care utilization, they determined.
"It is well established that physicians in different geographic regions practice differently. For example, physicians practicing in high-expenditure regions may be more likely than those in low-expenditure regions to recommend discretionary services for which strong evidence is lacking, and to test and treat patients intensively."
In contrast, the economic benefit of hospice care was found to be limited in regions of the country where the practice of medicine is more tight-fisted.
In these regions, increased hospice utilization generated a relatively low economic offset to inpatient and outpatient care at hospital settings, the researchers wrote.
"Whether or not hospice use results in cost savings is determined by the offset between the increase in hospice expenditures and the decrease in inpatient or outpatient expenditures."
Healthcare Policy Implications
While research has shown that hospice care has benefits for patients with terminal conditions, the study found that the economic benefits of hospital care vary regionally.
Incentivizing hospice care and launching hospice educational efforts in regions with high medical costs could have a dramatic impact on total U.S. healthcare expenditures, according to the study.
"Such targeted cost-saving measures may provide substantial economic benefits on a national scale, given that intense end-of-life care expenditures constitute a significant proportion of annual Medicare expenditures."
The shift to value-based care and consumerism is driving health systems and hospitals to optimize gains from nonpatient service activities and innovation.
This article first appeared in the March 2017 issue of HealthLeaders magazine.
For nonpatient service activities at health systems and hospitals, the evolution of financially lean value-based business models and consumer-driven care is transforming strategies for success.
As this evolutionary process unfolds, healthcare providers are facing new market limitations on mature mainstays of nonpatient service activities such as parking facilities. With patient satisfaction among the rallying cries of the value-based revolution, there are limits on generating revenue from parking garages and campus eateries, which patients prefer to enjoy as conveniences rather than to dread as drains on their wallets.
With these market realities, health systems and hospitals are turning to innovation activities as a vehicle for generating a host of benefits, including clinical care advances that improve quality and lower costs, new revenue stream opportunities, and support for broad strategic objectives.
Satisfaction among patients and employees is one of the primary limitations on traditional sources of nonpatient service revenue, says Stephen Allegretto, CPA, MPH, vice president of strategic analytics and value innovation at Yale New Haven Health System (YNHHS) in Connecticut, which includes an academic medical center, more than 6,300 physicians, and a 600-member multispecialty physician foundation. "We have generated parking and cafeteria income for years. That has been a long-term strategy for us. We need to do that; but the more we charge for parking, the more upset both our patients and our employees are."
To optimize the financial impact of nonpatient service activities, innovation is the most promising pathway to success, Allegretto says. "We have all of these 'other operating revenues' that we have had traditionally, and, as patient service revenue continues to decline, we need to find other revenue sources. … The sources we are talking about are nonpatient revenue, so how do we build those? We are not going to build up nonpatient revenue through parking and cafeteria. We are going to build it based on innovation."
YNHHS posted total operating and nonoperating revenue for the fiscal year ending September 2015 at $3.6 billion. Net patient service revenue was the dominant source of operating revenue at 95.6%.
"We have all of these 'other operating revenues' that we have had traditionally, and, as patient service revenue continues to decline, we need to find other revenue sources."
The potential to generate significant new revenue streams through the development of innovative products and services is tremendous, says Chad A. Eckes, MBA, executive vice president of corporate services and CFO at Wake Forest Baptist Medical Center, an integrated health system in Winston-Salem, North Carolina, that operates more than 1,000 acute care, rehabilitation, and psychiatric beds. The medical center and key Wake Forest University partners such as the medical school generated hundreds of millions of dollars in licensing revenue from medical devices based on negative pressure wound therapy (NPWT) technology.
"It was a substantial amount of revenue and a lot of margin coming from the medical center. So we have had a rich history of seeing what diversified revenue streams can mean to the organization. Our royalties on that ran out in 2012, so then we saw what life is like without having a large nonpatient service revenue, and we really want to create that again," Eckes says.
For the fiscal year ending June 2016, Wake Forest University Health Sciences (WFUHS), which includes the medical center and Wake Forest's medical school, reported total revenue at $2.3 billion with $2 billion from net patient service revenue representing the largest source of income. Other primary sources of operating revenue were grants, public and private contracts, and tuition.
With market constraints on generating revenue from traditional nonpatient services, the impact of nonpatient service activities is becoming more strategic than financial at many health systems and hospitals.
At Southwest General Health Center in Middleburg Heights, Ohio, a 332-licensed-bed nonprofit hospital, top executives have developed nonpatient service activities that support broad strategic goals such as community support and population health gains from a school nurse program and the hospital's LifeWorks fitness center, Vice President and CFO Mary Ann Freas says. "Aside from the typical sources of nonpatient service revenue, Southwest has developed programs that reach out into the community in the example of school health, provide patient convenience in the case of the retail pharmacy, or promote wellness in the case of LifeWorks," she says.
For the fiscal year ending December 31, 2016, Southwest generated total operating revenue at $344.6 million. The operating revenue was segmented into net patient service revenue, $333.3 million (96.7%), and other operating revenue, $11.2 million (3.3%). The LifeWorks fitness center accounted for a third of other operating revenue at $3.1 million, Freas said.
Hitting the nonpatient service activity ceiling
While academic studies have shown that traditional nonpatient service activities contribute significantly to total revenue margins, health system and hospital finance leaders are viewing innovation activities as a more promising option to not only bolster their balance sheets but also move other needles at their organizations.
A pair of academic studies published in the journal Health Care Management Review provide strong evidence that nonpatient service activities can have a measurably positive impact on total revenue margins.
University of Florida research published in 2009, titled "Nonpatient Revenues in Hospitals," examined the financial impact of nonpatient service activities at 143 Florida-based hospitals from 2003 to 2005. The two measures of nonpatient service revenue in the research mirror the revenue categories on financial statements: an "other operating revenue" category for income derived from standard hospital operations such as parking, and a "nonoperating revenue" category for activities unrelated to standard hospital operations such as financial investments.
The UF researchers—Niccie McKay, PhD, and Louis Gapenski, PhD—found that nonpatient service activity accounted for a relatively small portion of total revenue but had a significant impact on hospital financial margins.
"The overall role of nonpatient revenues was assessed by combining other operating and nonoperating revenues. … On average, hospitals in the sample had nonpatient revenues that accounted for 5.4% of total revenues," the University of Florida researchers wrote.
Despite the relatively low level of nonpatient service revenue as compared to total revenue, McKay and Gapenski concluded that the financial impact on operating margins was considerable. "Operating margin would have been 0.2 percentage points less without other operating activities. For nonoperating revenues, comparing average operating margin (3.3%) and average total margin before tax (4.8%) indicates that nonoperating activities contributed 1.5 percentage points. Overall, without nonpatient revenues, average total margins before tax would have been 1.7 percentage points lower," the UF researchers wrote.
McKay—who has retired and holds the title professor emerita at the UF Health Services Research, Management, and Policy department—says nonpatient service revenue remains a potentially decisive factor in whether hospitals have positive operating margins. "My sense is that things haven't changed all that much, in that nonpatient revenues are still pretty important," she says.
California hospital research that Health Care Management Review published in 2013—"Nonoperating revenue and hospital financial performance: Do hospitals rely on income from nonpatient care activities to offset losses on patient care?"—drew similar conclusions.
The 2013 study, which is based on data collected from 2003 to 2007, found "nonpatient care activities contributed substantially to overall profitability" at the 232 California hospitals in the sample. "Without engaging in any nonpatient care activities, hospitals' average total margins would have been 2.4% points lower than they actually were during the five-year study period," the journal article says.
Although the 2013 study is in line with the UF researchers' conclusion that nonpatient service activities boost total revenue margins, the California data showed that few struggling hospitals could rely on nonpatient service activities to boost profitability. "Although nonpatient care activities mitigated some of the losses on patient care services, less than 25% of hospitals generated sufficient income from nonpatient care activities to completely offset patient care losses," the 2013 study says.
As the healthcare industry becomes more patient-centered and consumer-driven, health systems and hospitals cannot expect to generate significant revenue from traditional nonpatient service activities such as food services and parking, Eckes says.
"If you do not want to pay for parking, you can park off-campus and walk, which is an option, and we have shuttles. But for convenience and to be able to have something right next to the building, we have these parking options that have a cost and a revenue opportunity associated with it. Even though we need to offset the cost of these conveniences, we do try to keep them reasonable. It is not like we are suggesting that this is a positive margin maker. We are just trying to keep up with the cost of parking facilities"—the goal being that nonpatient service activity at least covers its own costs, so that those costs do not have to be subsidized with patient service revenue, he says.
The same philosophy, which puts a premium on patient satisfaction and discounts financial return on investment, applies to food services and a hotel that the medical center operates, Eckes says. "Nonpatient services are not just cost- and revenue-related. It's also about meeting patients where their desired customer service level is. For example, putting the Starbucks and those types of items into the facility, number one, is improving the customer experience. It's providing a service that our customers are desiring. … We own a hotel that is available for patients and vendors and others. It is a break-even business that works."
Multiple benefits from innovation
In contrast to traditional nonpatient service activities such as parking facilities, which are constrained by market realities, innovation activities can generate multiple benefits for health systems and hospitals, including improving care, lowering expenses, boosting patient engagement, supporting strategic goals, and establishing new revenue streams.
To support medical technology innovation efforts throughout the Yale community, the Center for Biomedical Innovation and Technology (CBIT) was formed. The top goal for the health system's innovation initiatives is to generate a range of benefits across the entire organization, says Malgorzata "Margaret" Cartiera, PhD, investment and innovation manager at CBIT. "We want to make sure that innovation investments take into account the value-based system that Yale New Haven has in mind. The focus is the patient, and making sure that we are bringing new innovations and innovative advances that will bring value across the system," she says.
At University of Utah Health Sciences (UUHS), which features a 528-licensed-bed medical center and medical school, a surge of innovation activity over the past four years has improved quality of care, reduced costs, and boosted patient engagement.
"We are very clinically focused," says Rachel Hess, MD, MS, chief of the UUHS Health System Innovation and Research (HSIR) program, a research and innovation incubator launched in 2014. "We take research from the get-go and think through how it can be immediately disseminated into a clinical space."
For the fiscal year ending June 2016, UUHS posted total operating revenue of $3.7 billion and net patient service revenue of $1.9 billion.
HSIR participated in research published last year in the Journal of the American Medical Association, establishing new diagnosis criteria for sepsis that are designed to hasten treatment of the deadly infection. The research shows that the new diagnosis criteria cut the response time for administration of anti-infective treatment nearly in half, from 7.8 hours to 3.6 hours.
"The sepsis example started with one of the inpatient hospitalists identifying that there was a delay in receipt of antibiotic therapy that he felt was unduly long in patients identified with sepsis, and that earlier identification would be advantageous and could be achieved," Hess says.
The main financial measure for achieving success at HSIR, which received $607,265 in state funding for fiscal year 2016, is generating grant revenue, she says. "The ROI that is expected over five years is about 500%. … We were brought in to not only support but also to increase grant funding."
Hess adds that HSIR spent only $215,378 of the state money in fiscal 2016 and was able to bring in $1.7 million in additional grant funding.
In 2013, UUHS launched a healthcare information technology incubator program that employs student labor and a skeletal professional staff—the Therapeutic Games and Apps Lab (GApp Lab). The GApp Lab features a lean business model with high potential for return on investment, says Roger Altizer, PhD, director of The GApp Lab and an associate professor of population health science at the University of Utah School of Medicine.
"We have about 35 graduate students every semester on scholarships, and we get that money from private funders who pay us to do research, internal hospital money that pays for projects that they think are going to help patients, and research grants. Even with the research grants, we are making software games and other applications that are patient-facing. We've done over 40 discrete projects in the last three years, and we've gotten a couple million dollars in that type of funded research."
The GApp Lab is a low-cost option for UUHS to develop innovative healthcare IT applications such as mobile electronic medical record software developed at the incubator, he says. "We had a project that we did for $50,000 that received an external bid for a million dollars."
Growing demand for digital patient-engagement tools is a golden opportunity for UUHS and The GApp Lab, Altizer says. "Patient engagement is changing rapidly. From mobile apps to virtual reality, we can change the way that patients can interact with both their providers and with their own health data."
Health systems and hospitals are harnessing innovation activities to advance strategic goals.
ProMedica Health System, a locally owned, nonprofit healthcare network, is utilizing innovation activity to support the Toledo, Ohio-based organization's population health strategy, says Lee Hammerling, MD, chief physician executive and chief medical officer.
For the fiscal year ending December 2015, ProMedica posted total operating revenue of $3.1 billion, with $1.7 billion in net patient service revenue, $1.3 billion in premium revenue from ProMedica Insurance Corporation, and $73 million in other operating revenue.
At ProMedica, investing in innovation activities is essential to the health system's population health strategy, he says. "For years, our health system had been engaging in population health management for our patients. We have now broadened that definition of population health to include what we call the social determinants of health. Traditionally, health systems, hospitals, and doctors have not looked at factors like hunger, the ability to secure food for your family, housing, transportation, behavioral health issues, getting a job, and economic factors that impact the ability of people to access care."
Job creation is a key element of ProMedica's population health innovation activities.
In 2015, ProMedica Innovations, the organization's innovation division, opened its 6,000-square-foot Incubator. For startup partners, job creation must be part of the deal, says Hammerling. "When we talk with a company about helping them in a startup, one consideration is they have to create jobs locally."
Linking innovation activities to job creation in northwestern Ohio is part of ProMedica's population health mission to address problematic social determinants, he says. "We're part of the Rust Belt, and we have had some companies relocate from here. It has been a challenging community, but it is improving."
The ProMedica Innovations Incubator is generating positive results after just one year in operation. "It is at full occupancy with three startup companies, all currently generating revenue. The head count went from seven at initiation and is now approximately 40 people employed in total," Hammerling says.
One of the startups, VentureMed Group Ltd., received FDA approval in June to market a catheter device for treatment of peripheral artery disease. The FLEX Scoring Catheter is selling in the European and U.S. markets, he says.
Although the ProMedica Incubator is operating net-negative at this point, the facility's startup trio is paying for rent and services such as financial consulting, Hammerling says. The health system is projecting a positive return on investment from startups in the Incubator within 10 years from commercialization and licensing of products, he says.
Hitting the innovation jackpot
Innovation income at health systems and hospitals is reflected in both the operating and nonoperating revenue categories of annual financial statements.
In the operating revenue category, innovation activity revenue is shown in the "other operating revenue" subcategory as opposed to the patient revenue subcategory. This revenue is mainly in the form of contracts such as licensing deals and grant funding. In the nonoperating revenue category, innovation activity revenue is linked to equity earnings on investments in startup companies.
Wake Forest hit the medical-device licensing jackpot when a pair of medical center reconstructive surgical faculty members—Louis Argenta, MD, FACS, and Michael Moykwas, PhD—invented NPWT. In 1995, the Food and Drug Administration approved the first Wake Forest-patented NPWT device.
Devices developed with Wake Forest's NPWT technology were marketed with the Wound V.A.C. (vacuum-assisted closure) brand.
"Wound V.A.C. had its licensing fees because it is a product selling for billions of dollars worldwide. That has brought major and significant income into Wake Forest Baptist Medical Center over the last 15 years or so," says Eric Tomlinson, DSc, PhD, chief innovation officer at Wake Forest Baptist Medical Center and president of Wake Forest Innovation Quarter, the university's innovation district.
NPWT is based on the age-old principle of sucking on a snakebite to draw venom from the wound. Using a pump and tubing to create negative pressure in combination with a special dressing, Wound V.A.C. not only draws swelling fluids and harmful bacteria from a wound but accentuates the body's healing features.
NPWT has helped physicians around the world avoid an estimated 1 million limb amputations for serious wounds, according to the Chicago-based American College of Surgeons. In June 2016, the physician association honored Argenta with the Jacobson Innovation Award, calling NPWT "the most important advancement in wound healing in the past 25 years."
Wake Forest has garnered several hundred million dollars in licensing revenue from the sales of NPWT devices worldwide; but as with other inventions and advancements, others tried to grab a piece of the action.
In 1993, Wake Forest established an NPWT licensing agreement with San Antonio, Texas-based Kinetics Concepts Inc. (KCI). As the 2012 expiration of Wake Forest's patent rights approached, the license partners filed several patent-infringement lawsuits in the United States and abroad to protect the intellectual property, according to a Securities and Exchange Commission document that KCI filed in December 2010. The SEC document says Wake Forest and KCI filed nine patent-infringement lawsuits from May 2007 to July 2009.
In October 2010, a federal district court in Texas ruled against Wake Forest in one of the patent-infringement cases; then in February 2011, KCI filed a lawsuit in federal district court seeking a judgment that the company should no longer owe royalties. Wake Forest and KCI settled their patent dispute in July 2014, with the Texas company agreeing to pay $280 million in annual installments. The last payout—a $30 million obligation—is set for this June.
KCI made royalty payments to Wake Forest from 2008 to 2010, totaling $268 million, according to the 2010 SEC document.
Effectively managing product development and the licensing business cycle for inventions such as NPWT is a key element of success for innovation activities at healthcare providers and a core competency at Wake Forest Innovation Quarter, Tomlinson says.
"Now, the license has lapsed. The technology [is] still in the marketplace and still being sold very successfully without a license, so we no longer receive income from that license. And that is one of the challenges for the prioritization of ideas in such a property. You are dealing with a marketplace. The challenge in all of these innovation activities is understanding your market dynamics, the competition, the pricing, the time to market, the cost to market, and who can be your partner. Wake Forest Innovation is populated by people who do that market analysis evaluation prior to making financial investments in technologies," he says.
Innovation licensing contracts involving health systems and hospitals feature several key elements, including provisions for up-front payments to compensate the inventor organization for early development work on an innovation, payment terms for medical workers to conduct clinical trials, and revenue milestones, Tomlinson says. "All of those licensing agreements are fairly well-scripted and heavily vetted. We manage them in a very dynamic manner, paying close attention to each and every license field."
The nonprofit Hospital for Special Surgery (HSS) in New York City has scored revenue success with total knee implant prostheses.
In the fiscal year ending December 2015, HSS posted total operating revenue of $982 million and net patient service revenue of $820 million, or 83.5%. Other operating revenue of $145 million, or 14.77%, is relatively high compared to industry trends because the hospital contracts directly with the organization's physicians as opposed to establishing a financially separate physician group or association.
"Beginning at HSS in the 1990s, with the surgeon-engineer team of John Insall and Al Burstein, we developed the Insall-Burstein 1 [IB1], with a follow-on to that design known as the IB2. Those designs were licensed to the big ortho companies and sold well throughout the late '90s and early 2000s," says Leonard Achan, RN, MA, ANP, chief innovation officer and senior vice president of innovation and business development at HSS.
"Additional innovations were made with a different surgeon and engineer group that led to the 913 knee. That knee design included unique geometries that were anatomically inspired. More recently, as the 913 came off patent, we launched yet another knee design called the PS—a posterior stabilized knee that has additional innovations built into it. These total knee implants represent some 30 years of continuous innovation at HSS around the knee."
Combining medical and engineering expertise has been essential in the development of HSS knee implants, he says.
"The primary key to success is the deep relationship between the surgeon and engineer throughout the design process. This relationship is critical to the process—and one could not adequately do it without the other. This is a unique aspect of the design of these types of medical devices."
Knee implant innovations have generated about $100 million in aggregate revenue at HSS, he says. "The institution has benefitted from multiyear revenues from these distinct total knee implants."
Innovation incubators
Community hospitals can engage in innovation activities that are as robust as programs at health systems with much deeper pockets.
The Fogarty Institute for Innovation on the campus of El Camino Hospital is helping the Mountain View, California-based healthcare provider build a brand that is well-suited to the 443-bed facility's Silicon Valley market. "We had a group recently from the French Embassy who are very interested in cloning what we have, and the Danish government has sent multiple teams here. We are very small, but we have a very large impact and a significant reputation," says Kerry Pope, executive director of mentoring at FII.
"El Camino views themselves as the Silicon Valley hospital, and innovation is a core part of their marketing message to both patients and physicians," Pope says.
FII, which has entirely separate governance and finances from El Camino, generates several other benefits for the healthcare provider, says hospital Chief Operating Officer Mick Zdeblick.
"As a community hospital, El Camino Hospital is committed to being an innovative and locally controlled comprehensive healthcare organization that provides quality, cost-competitive services to improve the health and well-being of our community. Our partnership with Fogarty Institute for Innovation demonstrates this commitment. The location of the 'Fog Shop' on our hospital campus gives our staff and physicians the opportunity to engage with inventors and provide real-time and real-life insight. It's a great way to energize our staff and physicians and bring them along in thinking of ways to improve the delivery of care," he says.
"Several FII incubator companies have conducted clinical trials at El Camino Hospital. Participation in these trials, when it strategically aligns, allows our staff and physicians to test the feasibility of the technology and provide valuable learnings to the company. It also offers our patients, when appropriate, with an opportunity to take part in the latest research studies."
Keeping El Camino's finances separate from FII's finances, which include the potential to generate revenue from private startup companies, helps protect the hospital's nonprofit status, Pope says. "About 80% of FII's revenue is from philanthropy and the balance comes from earned income through providing educational services for corporate partners and other entities. El Camino Hospital is a nonprofit hospital—they have their own discrete financials, and the two are never intertwined."
Financial interactions between the hospital and FII have been limited to facility expenses, according to FII CFO Starr McNamara.
In 2007, FII received $780,000 in loans from El Camino to pay for "tenant improvements" for the institute's office and incubator space, McNamara says. FII pays El Camino $156,000 annually for use of the 13,000-square-foot basement space where the institute's "Fog Shop" incubator is located, and the hospital donates the use of medical office space that is considered a $250,000 noncash contribution to FII, she says.
San Carlos, California-based Prescient Surgical, an FII startup company that received FDA approval for its CleanCision surgical-site device in December 2016, is poised to generate significant cost reductions at El Camino, Pope says. "We're especially proud of that one because of the immediate return to the hospital's bottom line by preventing infections that we know are going to happen. Nobody likes to talk about hospital-acquired infections, but they exist—and every time they happen and they require a readmission, it is $20,000 to $40,000 that the hospital has to eat."
For hospitals, innovation activities generate benefits far beyond direct financial impacts, says Jonathan Coe, cofounder, president, and CEO of Prescient Surgical, which raised $7 million of equity investment to develop CleanCision.
"It's important not to focus too much on the financial piece, because if you are a hospital system CEO, you have to say, 'We need to deliver better care, we need to deliver it at less cost, and we need to deliver it with less variability.' You can't constrain yourself to the existing technologies that are out there and cannot necessarily rely on the external community to drive new innovation. The people outside may not be solving your problems."
New nonpatient service activity imperatives
As health systems and hospitals adapt to the shift toward value-based care, optimization of nonpatient service activity requires generating benefits that can be just as significant as boosting operating margins, Coe says. "I think hospital administrators are realizing they need to go through a phase of housecleaning and figure out how they can improve upon the things that they already have today. It is not so much about how they make more money. It is about how they get more customers by doing the best care and avoiding the costs that have limited their profitability."
Manchester, New Hampshire-based Catholic Medical Center (CMC), a not-for-profit 240-staffed-bed acute care hospital, and home of the New England Heart Institute, has a multipronged strategy for nonpatient service activities, says Edward "Ted" L. Dudley III, executive vice president and CFO. For the fiscal year ending June 2016, CMC posted total revenue of $377.9 million, with net patient service revenue of $355 million and other operating revenue of $22.9 million.
CMC has begun offering laboratory and hospitalist services to acute care and postacute care facilities "to leverage core services we do well and assist those who struggle with cost or finding the needed resource," Dudley says.
From a financial perspective, offering laboratory services to other New Hampshire-based healthcare providers is more helpful in covering overhead costs than increasing nonpatient service revenue, he says. "We have to offer a margin because we can't offer these services for free or below our cost. Our partners can basically take what limited resources they have and put them to better use. … We estimate that annual savings to a small critical-access hospital can range anywhere from $350,000 to $500,000. Part of that is coming from reducing FTEs that they no longer need. For us, the margin might only be $150,000 to $200,000; but still, it helps shed some of our overhead."
"We do not look at this as a gigantic revenue source as much as it is a mission-driven core competency maintaining a healthier playing field for everybody."
Dudley says offering laboratory capabilities and hospitalists as professional services to other healthcare providers is bolstering two strategic goals at CMC: supporting the health system's medical mission and positioning the organization for a wave of consolidation that the C-suite sees on the horizon. "It's not a big moneymaker for us, but it does support the mission of CMC to improve the health of the populations we serve; and, since we draw patients from all over the state, we consider this core to our mission. … What we have adopted as part of our mission in New Hampshire is providing services to those hospitals that don't have the financial wherewithal or capacity to offer the same level of quality at a lower cost."
Having strong healthcare-provider partners generates strategic benefits for CMC and the health system's external counterparts, he says. "We do not look at this as a gigantic revenue source as much as it is a mission-driven core competency maintaining a healthier playing field for everybody in New Hampshire. … The state is on the precipice of having a lot of consolidation, and if our lab and hospitalist services help keep other hospitals core to their mission, then we believe that is in our best interest as well."
With leadership responsibilities for both a large health insurance carrier and a large health system, the top financial executive at Highmark Health has a unique vantage point on efforts to transform the healthcare industry.
In her role as executive vice president and CFO of Highmark Health, Karen Hanlon, CPA, has a double vision of the healthcare industry.
Highmark Health is the parent company of Highmark Inc., which is one of the country's largest Blue Cross Blue Shield affiliates, and Allegheny Health Network, which is a health system that features seven acute-care hospitals. In 2015, Highmark Health posted consolidated revenue at $17.7 billion and employed more than 35,000 workers.
In a wide-ranging recent interview with HealthLeaders, Hanlon was asked to comment on consolidation in the healthcare industry and other timely topics.
For Highmark Health, she says the past year's failed attempts at payer megamergers—the Aetna-Humana and Anthem-Cigna deals—are more of a matter of curiosity than a pressing business concern.
"For us, in the markets we are in, provider consolidation has been a bigger and more real challenge than the payer consolidations. But every market is different—healthcare is local."
Highmark Inc. markets health plans in Delaware, Pennsylvania and West Virginia. Allegheny Health Network (AHN) serves patients mainly in western Pennsylvania.
The Department of Justice-initiated collapse of the Aetna-Humana and Anthem-Cigna mergers are unlikely to curb consolidation efforts in the healthcare payer sector, Hanlon says.
"I doubt that we have reached the end game. That does not have to mean that you take the top five and that gets concentrated to three. I think about it more broadly than that. If you think about all of the different health plan carriers throughout the nation, to a certain extent scale matters."
Highmark Inc. and AHN are focusing their business model strategies on delivering medical services with value in mind, she says.
"We look at provider consolidation through the lens of being able to deliver a lower cost of care and to deliver more value to our communities… Kaiser is a good example that people can point to as an operating model that is definitely trying to deliver at a lower cost. Geisinger here in Pennsylvania has regularly been held up as an example of a provider system that is focused on delivering high-value care."
Value-based care models are leaner financially than the fee-for-service business model that has dominated the healthcare sector for decades. Hanlon says this financial reality of the shift to value in the delivery of medical services poses a challenge for all healthcare organizations—even nonprofits.
"For us, we are a nonprofit; so we don't have to have a financial target. We don't have to report to Wall Street or meet shareholder expectations. We do need to make sure we are meeting our mission and our vision in terms of caring for those in the community and delivering high-quality healthcare. At the same time, we do have to be fiscally responsible," Hanlon says.
While Highmark Health is not beholden to the barons of Wall Street, the organization is keenly aware of financial considerations.
"We have ratings from three of the ratings agencies—they regularly are looking at how we are doing and want to make sure we are delivering appropriately against their expectations, and we do care about that. We have outside financing from banks and bond holders, and they also are monitoring us to make sure that we are performing in a fiscally responsible manner," she says.
"We do not have a number that we have to hit for shareholders, but we do triangulate on the expectations that other constituencies have of us; and we need to make sure we continue to meet those expectations, so that we are able to continue to offer products and services in the market."
These considerations come with concrete financial consequences.
"Without the appropriate ratings from the ratings agencies, our customers are not going to think as highly of us. Without good marks from the banks, we are going to have a tough time accessing capital," Hanlon says.
Two St. Louis-based providers enter a partnership deal that is expected to be finalized in the spring.
Mercy health system, which features a service area in four Midwestern states, and St. Louis-based St. Anthony's Medical Center announced an affiliation deal this week.
Mercy, which also is based in St. Louis, operates 32 acute-care hospitals in Arkansas, Kansas, Missouri and Oklahoma. In the 2016 fiscal year, the health system reported $5 billion in operating revenue.
St. Anthony's Medical Center features a comprehensive healthcare complex with 767 licensed beds, a Level II trauma center, and Level I stroke center. The organization also operates four urgent care centers. For the 2015 fiscal year, St. Anthony's reported total revenue at $482 million.
Both organizations are faith-based healthcare providers.
Care access and coordination of care are key goals of the affiliation, Donn Sorensen, Mercy regional president, said in a media statement announcing the deal Monday.
"St. Anthony's leadership and legacy of quality, compassionate care aligns naturally with Mercy. Their strong presence in the growing south St. Louis County area enables us to work together to expand access and provide a more coordinated system of care for patients across the entire St. Louis region."
The definitive agreement announced Monday calls for St. Anthony's to affiliate with Mercy's four acute-care hospitals in the metropolitan St. Louis area. Further details of the affiliation deal are under negotiation and are expected to be finalized this spring.
The affiliation between Mercy and St. Anthony's reflects a national trend of healthcare providers entering consolidation contracts that fall short of traditional merger and acquisition (M&A) transactions.
Survey data in a HealthLeaders Media Intelligence Report shows that affiliations, collaborations or alliances are the most common forms of reported non-M&A contractual relationships.
A Georgia-based oncology practice has embraced a multifaceted approach to shifting away from the fee-for-service business model to value-based care.
To succeed in the transformation to value-based care, John K. Hudson, MD, and his colleagues at Augusta Oncology have a plan.
Hudson earned his medical degree from the Augusta-based Medical College of Georgia and has been a practicing oncologist for more than two decades.
Below, he shares the five-step process that Augusta Oncology has adopted to support the practice's quest to succeed in providing value-based care.
1. View Value-Based Care as an Opportunity
The rise of value-based care opens a new chapter for oncologists and their practices, one with its own set of processes, requirements and measures.
But it's critical not to get overwhelmed and lose sight of the exciting opportunity before us. Value-based care promises to reinforce a whole-person, team-based approach that will significantly improve the quality, accessibility, and affordability of the care we deliver to cancer patients and their loved ones every day.
Meanwhile, applying the most advanced treatments with greater efficiency ultimately benefits everyone in our healthcare system.
2. Be Proactive in Adopting New Payment Models
At Augusta Oncology, we knew from the start that we wanted to engage early to both adopt and help shape emerging alternative payment models. We became one of 190 oncology practices from across the country selected for the Centers for Medicare & Medicaid Services Oncology Care Model (OCM).
The OCM enables us to deploy and extend patient-oriented services that address challenges we historically faced to delivering the highest quality care across all patients. In exchange, the OCM provides needed reimbursement for these services, helping keep patients safe while they fight cancer and away from costly hospital visits.
Similar programs are on the horizon for other specialties, and we recommend that practices actively engage them and consider involvement as part of their long-term value-based care success.
3. Prepare for Learning Curves
As oncologists assume holistic responsibility for the quality and cost of patient care, it is important to anticipate the new knowledge and capabilities that must reside in the practice.
Alternative payment models are about much more than adding new forms to an EHR or capturing metrics to populate and submit new reports. At Augusta Oncology, we have had to develop skills and capabilities to answer fundamental questions that support patient safety:
Who is at the highest risk?
How can we better support their complete health and well-being, across all conditions and settings of care?
How can we most effectively guide them when they need it most?
4. Commit to Practice Transformation
Putting value-based care knowledge and capabilities into action requires assessing a practice and how to optimize it for the new healthcare landscape—then enacting a plan for change.
Implementing the principles of population health management has been core to Augusta Oncology's journey. Specifically, we have focused on:
Greater patient engagement and education;
Addressing disparities in access to care; and
Providing increased support for navigating the healthcare system, clinically and financially.
The OCM has been a wonderful first step in helping us to deliver on these [principles]. For other practices in oncology and across specialties, the takeaway is to expect nothing short of practice transformation to optimize the results from these new skills, clinical capabilities and operations.
5. Rethink Partners and Tools to Support
The technologies that supported community-based oncology practices in the fee-for-service era often focused on charting and billing patient visits. As our practice has adopted value-based care, we've needed to be thoughtful in assessing how best to operationalize entirely new needs.
That has meant starting with a comprehensive vision of how we want to holistically support our patients across all settings, then looking for new partners with deep, dedicated subject matter expertise and tools.
For example, on the OCM front, we have implemented purpose-built technologies for value-based care coordination and management, advanced analytics, and registry and regulatory reporting to take our practice to the next level.
Healthcare spending is expected to represent 19.9% of gross domestic product by 2025, according to government economists and actuaries. It accounted for 17.8% of GDP in 2015.
By 2025, healthcare spending is projected to account for one-fifth of the country's economic activity, according to an annual report based on federal data.
National health expenditures are projected to grow "at an average annual rate of 5.6% for 2016 – 2025 and represent 19.9% of gross domestic product by 2025," according to the report published online Wednesday by Health Affairs.
Healthcare spending accounted for 17.8% of GDP in 2015.
Data for the report, "National Health Expenditure Projections, 2016-25: Price Increases, Aging Push Sector to 20 Percent of Economy," was drawn from the Centers for Medicare & Medicaid Services and the Department of Commerce.
The findings are slightly more optimistic than the analysis of last year's national health expenditure projections. In last year's report, national healthcare spending was projected to grow at a 5.8% annual rate and account for 20.1% of GDP by 2025.
One of the reasons for the modestly rosier scenario is actual and projected slower growth in medical service prices, the lead author of this year's report said Wednesday during a conference call with members of the media.
"Growth in medical prices—especially for 2016, 2017, and 2018 were a little bit slower in this year's report than they were in last year's report," said Sean Keehan, an economist in the CMS Office of the Actuary, and the report's lead author.
Price Drivers
Two primary factors are expected to be the main drivers of increased healthcare spending over the next decade, medical prices and use and intensity of services, this year's report says. Two secondary factors cited are population growth and the population's age-sex mix.
Changes in overall medical-service prices are mainly the result of economy-wide inflation and "medical-specific price inflation," according to the report, which defines medical-specific price inflation as the variation between medical and economy-wide inflation.
Inflation's Effect
From 2014 to 2016, the annual average rate of medical-specific price inflation was -0.2%, the lowest rate since 1973.
Medical-specific price inflation is expected to be a key factor in overall medical-service prices from 2020 to 2025, increasing at an annual average rate of 0.5%.
The report projects the annual average rate of overall medical-service prices to increase steadily over the next decade:
1.6% this year
2.4% next year and 2019
2.7% from 2020 to 2025
The conclusions of the report highlight both regulatory uncertainty and continued pressure from payers to contain spending over the next decade.
Conclusions
The authors concede that their conclusions are based on continuation of the current regulatory framework, despite significant uncertainty about how regulatory changes such as repeal of the Patient Protection and Affordable Care Act could impact healthcare spending.
"This analysis finds that under current law and following the recent significant period of transition associated with coverage expansions, healthcare enrollment and spending trends are projected to revert to being fundamentally driven by changes in economics and demographics."
Regardless of any regulatory changes, the report concludes that pressure from payers to contain healthcare spending will continue over the next decade. "Employers, insurers, and other payers will continue to pursue strategies that seek to effectively manage the use and cost of healthcare goods and services."
Variations exist in the volume of hip and knee replacement procedures among hospitals that participated in a Medicare bundled payment program, but the program was not was responsible for those variations, researchers say.
Criticism leveled against a Medicare bundled payment program for lower extremity joint replacement procedures is unfounded, according to a study published by the Altarum Institute, a nonprofit research and consulting organization.
Elliott Fisher, MD, MPH, director of The Dartmouth Institute for Health Policy and Clinical Practice wrote the JAMA editorial. His primary criticism of BPCI was that bundled payments could perpetuate fee-for-service financial incentives that spur service volume.
Altarum researchers found variations in the volume of hip and knee replacement procedures among hospitals that participated in BPCI. They concluded, however, that the bundled payments program was not responsible for those volume variations.
Methodology
BPCI was launched in October 2013. The study used Medicare data on inpatient-service claims for hip and knee replacement procedures performed under BPCI's bundled payment model drawn from 47 hospitals between January 2014 and December 2015.
That data was compared to data on procedures performed at 2,592 non-participating hospitals between January 2011 and December 2013.
"The rate of increase in the volume of procedures was significantly lower than in the rest of the country" than in BPCI-participating hospitals, the Altarum study states.
"Our study shows that the initial group of BPCI participants, those that went into the program in October 2013 and January 2014, had a rate of [volume] increase between baseline and performance years that was significantly lower than the national rate. In fact, for that group, the volume of procedures in 2015 was lower than in 2014."
Drivers of Volume
The number of Medicare beneficiaries living in the area around BPCI-participating hospitals and the level of hospital competition in those markets were key drivers of service volume variation, the Altarum study says.
"Increasing volumes between 2011 and 2014 were associated with growth in the population of Medicare fee-for-service beneficiaries and the number of hospitals in a [Hospital Referral Region]."
Hospital consolidation and competition were additional key drivers of increased service volume is some marke
Payers and providers alike must adapt to leaner business models and patient populations that are older and frailer than a general patient population.
Medicare and commercial accountable care organization (ACO) models are not created alike.
MaineHealth ACO, which generated a Top 10 shared savings payment in the first performance year of the Medicare Shared Savings Program, has found that participating in MSSP is more financially challenging than commercial ACO contracts.
"From a financial perspective, our commercial payers are willing to help support the work that we do; so they see the value in our care management programs and the work that we do to integrate our physician practices," says Jen Moore, chief operating officer of MaineHealth ACO, based in Portland, ME.
"We do not get that kind of funding from the governmental programs," Moore says.
"All of the commercial payers are willing to pay a per-member-per-month fee to the ACO for doing care management, working to communicate within our care network and being the liaison between our providers and the payer. They see tremendous value in all of that."
Commercial accountable care contracts tend to have better financial incentives than MSSP offers for physician practices that participate in MaineHealth ACO, she says.
"For the physician practices, [commercial health plans] are willing to pay for pay-for-performance. So they will have a shared-savings arrangement; but many of them will also say, 'If you are also successful on quality metrics, then we are willing to pay you additional dollars for that success.' "
The leaders of ACOs must be prepared for tough contract negotiations with commercial payers. "It is not always rosy and we have to fight for that support. More and more payers are tying dollars to performance," says Moore.
"Though pay-for-performance is a reasonable approach, it doesn't recognize the upfront investments made by practices to do the work that is not paid for in our current fee-for-service environment."
Investing in ACOs
Aetna Inc. provides patient-centered medical home and paor-performance incentive payments to healthcare providers to help finance investments necessary to succeed in ACO contracts, says Paul McBride, MSPH, CEO of Accountable Care Solutions-Aetna, a business unit of the Hartford, CT-based commercial payer.
"Providers need to invest in primary care office staffing; information technology [such as] electronic medical record enhancements, a data warehouse and referral management tools; and a centralized support team," McBride says.
"The health plan will often help offset some of these upfront provider costs with medical home or population health payments."
If ACOs and the physicians who participate in them operate successfully, then health plans can generate financial gains. "At Aetna, depending on the ACO model, we have seen from $7 to $29 per-member-per-month savings," he says.
As of December, Aetna had established contracts with more than 280 ACOs, according to McBride.
To increase their odds of success in a Medicare ACO model, provider organizations need to gear up for an opportunity that has high risks and potentially high rewards, says Emily Brower, MBA, vice president of population health at Newton, MA-based Atrius Health.
"For this population, which has high-risk patients, there does seem to be a significant return on bringing care to the patient. You have to know which patients will benefit most from the highest-cost part of your delivery system," she says.
For the 2015 performance year, Atrius earned $4.4 million in shared savings in the Pioneer ACO, Medicare's first ACO model that requires healthcare providers to assume both upside and downside risk for the costs of patient care. The nonprofit organization earned $2.8 million in shared ACO savings in 2014.
"Sending care to one patient's home is expensive; but we were careful in identifying those patients, and so far that has had very positive ROI and the patient satisfaction is just incredible," Brower says.
Generating nonpatient service revenue such as grants and rental property income is key to keeping the black ink flowing, says the CFO of a two-hospital organization.
Patient services are the dominant source of operating revenue at the vast majority of health systems and hospitals, but academic studies and independent research have found that a small but significant portion of revenue comes from non-clinical sources.
At seven healthcare organizations contacted for an upcoming HealthLeaders magazine article, net patient service revenue as a percentage of total operating revenue ranged from 83% to 96% in recent years. All but two organizations posted net patient service revenue figures above 94%.
Kansas City, Missouri-based Truman Medical Centers, which operates two acute-care academic hospitals, posted a relatively low 83% figure for net patient service revenue as a percentage of net operating revenue in 2016 mainly because of its safety-net mission.
Last year, TMC generated $516 million in net operating revenue. Nonpatient operating revenue—a balance sheet category that accounts for revenue related to a health system's core mission—was 16% of net operating revenue.
The remaining 1% of TMC's net revenue was generated from financial activity unrelated to the health system's core mission.
At safety-net hospitals and other organizations that operate on thin margins, every source of revenue is precious, TMC CFO Allen Johnson says. "You have to look at opportunities that we probably have not taken advantage of before."
Strong Ties with Other Businesses
TMC has in recent years embraced partnerships with Walgreens pharmacies and U.S. Bank, which operate branches at TMC's pair of campuses. TMC also has a strong partnership with Cerner Corporation.
"Cerner is right in our backyard here in Kansas City, and we have a very close relationship... In fact, they use Truman as a client visit site. A lot of Cerner clients that come into a Truman facility look at our Cerner information technology products," says Johnson.
TMC does not receive direct revenue from Cerner for those client visits, but does receive credits against IT software expenses. "We are expanding that relationship now," says Johnson. "We want to get to the point where we are going to be Cerner's living lab."
Securing grant funding and charitable contributions are an essential element of financial success at safety-net health systems and hospitals, he says.
Grants and Philanthropy
"A major nonpatient revenue source for a safety net like TMC is grants and contributions. Because of mission-related financial challenges, TMC generates limited capital funding. TMC and its charitable foundation [have] developed strong relationships with both local and non-local foundations to fund capital projects."
TMC has recently drawn on grants and contributions to finance these capital projects:
An inpatient bed expansion and an inpatient mental health unit.
Funding source: A $4.5 million in grant from The Health Care Foundation of Greater Kansas City.
The purchase of a NanoKnife surgical system for the treatment of pancreatic cancer.
Funding source: A $500,000 grant from The Hall Family Foundation
The bottom line for safety-net health systems and hospitals is that every dollar of revenue is important to keep the organization financially sound, Johnson says. "We have all kinds of challenges here. So these other nonpatient revenue streams are very important for us to maintain our financial viability."
